The Rodriguez Company is considering an average-risk investment in a mineral wat

Question

The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has a cost of $175,000. The project will produce 950 cases of mineral water per year indefinitely. The current sales price is $150 per case, and the current cost per case is $112. The firm is taxed at a rate of 38%. Both prices and costs are expected to rise at a rate of 3% per year. The firm uses only equity, and it has a cost of capital of 14%. Assume that cash flows consist only of after-tax profits, since the spring has an indefinite life and will not be depreciated.

Explanation / Answer

before tax cash flow per year = 950 * (150-112) = 36100

after tax cash flow per year = 36100* (1-0.38) = 22382

PV of cash flows = 22382/0.14 = 15987.4286

NPV = -175000 + 15987.4286 = -15129

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